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Endogenous Capital Market Imperfection, Informal Interest Rate Determination and International Factor mobility in a General Equilibrium Model

Sarbajit Chaudhuri () and Manash Gupta ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper makes a pioneering attempt to provide a theory of determination of interest rate in the informal credit market in a less developed economy in terms of a three-sector static deterministic general equilibrium model. There are two informal sectors which obtain production loans from a monopolistic moneylender and employ labour from the informal labour market. On the other hand, the formal sector employs labour at an institutionally fixed wage rate and takes loans from the competitive formal credit market. We show that an inflow of foreign capital and/or an emigration of labour raises (lowers) the informal (formal) interest rate but lowers the competitive wage rate in the informal labour market when the informal manufacturing sector is more capital-intensive vis-à-vis the informal agricultural sector. International factor mobility, therefore, raises the degrees of distortions in both the factor markets in this case.

Keywords: Informal credit; formal credit; moneylender; foreign capital; emigration; general equilibrium (search for similar items in EconPapers)
JEL-codes: D4 D42 F21 F22 O17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-iue and nep-mig
Date: 2013-11-02
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